Reed Smith Client Alerts

Founders, projects and blockchain service providers, like other industry participants, usually take it for granted that they have no duty to return property if digital assets are lost or stolen. However, in a highly significant judgment, the English Court of Appeal has now opened the door to a future decision on the extent to which developers owe legal duties in such circumstances.

This will be the first time an English court has considered this issue, and if it finds that duties are owed, it could significantly increase the scope of obligations owed to users by blockchain service providers such as exchanges or operators of DeFi

The matter involves claims by Tulip Trading, run by Dr Craig Wright, against the core developers of a number of networks for the return of private keys allegedly lost following a hack on Dr Wright’s home computer.

The lower court had rejected these claims out of hand. In its 25 March 2022 decision on service outside of jurisdiction, the English High Court determined that there was “no serious issue to be tried on the merits of the claim” that fiduciary or tortious duties were owed.

In particular, the lower court found that:

(a) The developers were a “fluctuating, and unidentified body” for whom it would not make sense to impose continuing obligations.

(b) The positive duty alleged (to introduce a software patch to return a user its private keys) differed from other sorts of duty (such as a duty not to introduce malware or comprise network security).

(c) Such steps would benefit one user, not the class of users generally, some of whom might object to a user bypassing the private key system in a supposedly decentralised network.

(d) The duty would be owed to an “unknown and potentially unlimited” class of users.

On 2 February 2023, the Court of Appeal issued a decision upholding the user’s appeal against the first instance decision. While the Higher Court did not go so far as to itself find that there was a fiduciary duty to introduce code to allow for the return of the user’s crypto assets, it did consider that there was a serious question, which should proceed to full trial.

The Court of Appeal acknowledged that for the user’s case to succeed, there would need to be a significant development in the common law on fiduciary duties. However, it also considered there could be realistic arguments for this position, given the relationship between developers and users. The judgment also recognised the potential implications for legal recognition of the concept of decentralisation generally, noting, “If the decentralised governance of bitcoin really is a myth, then in my judgment there is much to be said for the submission that bitcoin developers, while acting as developers, owe fiduciary duties to the true owners of that property.”

The future decision will be highly anticipated not only from an English-law perspective but also more generally across common-law jurisdictions where the court’s jurisprudence may be treated as having persuasive authority. The judgment will therefore be of considerable interest to all blockchain industry participants, including project developers, service providers and investors.